Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Commonwealth education or training payments
Overview
2.1 Part 2 of Schedule 1 of the Bill will amend the pay-as-you-earn (PAYE) provisions in the Income Tax Assessment Act 1936 (the Act).
2.2 The amendments will define, in a generic way, Commonwealth education or training payments subject to PAYE. The generic term will also be used in certain exemption and rebate provisions to deal with the income tax treatment of Commonwealth education or training payments.
Summary of the amendments
2.3 The amendments will replace the current references to specific Commonwealth education or training programmes in the PAYE, rebate and exemption provisions of the Act with a generic term.
2.4 The proposed amendments to the PAYE provisions will apply to payments made after the 28th day after Royal Assent so as to not impose any retrospective PAYE obligations on the Commonwealth's paying agencies [subitem 16(2)] . The proposed amendments to the income tax exemption and rebate provisions will apply from 1 July 1996 [subitem 16(1)] . This means that to the extent that all or part of a Commonwealth education or training payment may be exempt from tax, or may qualify the recipient for a beneficiary rebate, the amendments avoid having to apportion the exemption treatment or rebate entitlement over part of a year of income.
Background to the legislation
2.5 Not all of the payments currently made by the Department of Employment, Education, Training and Youth Affairs (DEETYA) in respect of the education or training schemes that they administer are covered by the definition of 'salary or wages'.
2.6 There has been significant expansion in recent years in the number of education or training schemes administered by DEETYA. Because of this it is appropriate to replace current references to specific education or training programs with a general expression. A simple update of the current list of DEETYA's programs would be extensive and would leave the need for frequent amendment.
2.7 A similar situation exists in relation to certain rebate and exemption provisions of the income tax law. Broadly, the intended effect of the provisions is that no income tax is payable on amounts paid under the education or training schemes to the extent that they are consistent with Jobsearch or Newstart allowances paid by the Department of Social Security (DSS). Many of the DEETYA payments are similar in nature to a DSS allowance. If the allowance is the only income of the recipient, it is not subject to income tax through the application of those rebate and exemption provisions.
2.8 The use of the general expression in the rebate and exemption provisions to describe the Commonwealth education or training scheme payments administered by DEETYA and some other Commonwealth agencies will ensure the taxation result intended to apply to such payments is consistently achieved even when changes are made to those schemes.
Explanation of the amendment
2.9 The amendments are contained in Part 2 of Schedule 1 of the Bill.
2.10 A 'Commonwealth education or training payment' will be defined in subsection 6(1) of the Act [item 2] . The definition, expressed in general terms, will replace the existing specific references in the existing definition of 'salary or wages' in subsection 221A(1) of the Act to various schemes of assistance administered by the Commonwealth (for example the Veterans' Children Education Scheme). The use of a general term will do away with the need to amend the tax law, whenever a new scheme of assistance is introduced, to ensure that payments under the scheme are covered by the PAYE provisions.
2.11 All or part of a Commonwealth education or training payment may also be exempt from tax and may qualify the recipient for a rebate (see paragraph 2.23 below).
2.12 A payment is a Commonwealth education or training payment only if it is paid by the Commonwealth as an allowance or reimbursement. Consequently, payments made in connection with an education or training program to, for example, employers or service providers are not covered by the definition. Those payments are in the nature of subsidies or remuneration for services.
2.13 Further, the definition applies only where the payment is made to or on behalf of a participant in a 'Commonwealth labour market program' [paragraph (a) of the definition] or a student, being 16 years or older, who receives the payment as assistance under one of the Commonwealth's student assistance schemes [paragraph (b) of the definition] .
2.14 The term 'Commonwealth labour market program' is also to be defined in subsection 6(1) of the Act [item 3] . The definition covers all Commonwealth programs that exist to provide training or assistance to unemployed persons to help them obtain employment or to become self-employed, or to employed persons to assist them to continue to be employed. The majority of those programs are currently administered by the Department of Employment, Education, Training and Youth Affairs.
2.15 A Commonwealth student assistance scheme would include schemes currently known as Austudy and Abstudy. Although specific reference to those schemes in the tax law will be removed, the taxation treatment of their payments is unaffected.
Amendments to exemption and rebate provisions
2.16 The definition of 'Commonwealth education or training payment' [item 2] for the purposes of the PAYE provisions enables that general term to be used to replace other specific references in the Act to schemes of assistance covered by that term, and in doing so to correct certain anomalies. As with the PAYE provisions, the use of the general term has the benefit of doing away with the need to amend the tax law whenever a new scheme of assistance is introduced.
2.17 Accordingly, existing references in paragraphs 23(z) and 23(zaa) of the Act to schemes of assistance covered by the general term are replaced by that term [items 4 to 6] . This does not change the tax treatment of any payments that are presently exempt under those paragraphs. In particular, the current exemption for certain educational payments in respect of children under 16 years of age is maintained as the payments are covered by the introductory words to paragraphs 23(z) and 23 (zaa) of the Act, but not by the term 'Commonwealth education or training payment'. That term only covers student assistance payments in respect of persons who have turned 16 years of age.
2.18 While the term 'Commonwealth education or training payment' is broad enough to cover an education entry payment under Part 2.13A of the Social Security Act 1991 , specific reference in paragraphs 23(z) and 23(zaa) of the Act to education entry payment is maintained to reflect the specific treatment of education entry payment in Division 1AA of Part III of the Act (section 24ABNA of the Act).
2.19 In addition, Subdivision BA of Division 1AA of the Act, which currently applies to exempt from tax certain components of youth training allowances, is replaced by broader provisions which cover all Commonwealth education or training payments [items 7 to 9] . This corrects an anomaly where the non-living allowance (or supplementary amounts) of some education or training payments were exempt from tax, but in other cases were taxable. Commonwealth education or training payments will now generally receive similar treatment to benefits such as Jobsearch or Newstart allowances paid under the Social Security Act 1991 such that, in broad terms, the living allowance will be assessable, and the supplementary amounts exempt [item 9 - new subsection 24ABZF(1)] .
2.20 The only exception is in respect of payments by way of a scholarship, bursary or other educational assistance that are made on condition that services will (or will if required) be rendered or continue to be rendered to the Commonwealth. No part of payments of this kind will be exempt [item 9 - new subsection 24ABZF(2)] . This preserves the rule currently contained in subparagraph 23(z)(i) of the Act.
2.21 New section 24ABZE describes the amounts of a Commonwealth education or training payment which will qualify as supplementary amounts. Provided a payment is made to assist with the costs of one or more of the listed items, or is by way of pharmaceutical allowance, it will be exempt from tax. This would be so even if the recipient did not himself or herself meet the initial cost, for example, where rent or a telephone bill was paid by the recipient's partner.
2.22 New paragraph 24ABZE(2)(m) is designed to cover Commonwealth education or training payments that are made to cover extraordinary expenses that may otherwise prevent a person from undertaking the education or training.
The beneficiary rebate amendments
2.23 Section 160AAA of the Act provides for a rebate of tax (commonly known as the beneficiary rebate) in respect of certain amounts ('rebatable benefit'). Only some Commonwealth education or training payments are currently included in the definition of rebatable benefit. As with the exemption provisions discussed above, this is anomalous in that some payments qualify for a rebate but others do not, depending on the program under which they are paid.
2.24 To correct this, references in the definition of rebatable benefit in subsection 160AAA(1) of the Act to schemes of assistance which are covered by the term 'Commonwealth education or training payment' are replaced by that term [items 11 to 13] . The result is that the living allowance amount of Commonwealth education or training payments will generally qualify for beneficiary rebate in the same way as the living allowance amount of benefits such as Jobsearch or Newstart allowances paid under the Social Security Act 1991 . Payments which presently qualify for beneficiary rebate are unaffected by this change. For example, payments of Textile, Clothing and Footwear Special Allowance, which is currently covered by paragraph 160AAA(1)(e) of the Act, will now be covered by the general term.
2.25 Two types of payment are specifically excluded from entitlement to the rebate. The first relates to payments made to or on behalf of a person who is an employee of an employer who is entitled to a Commonwealth subsidy in respect of the employment of the person [item 11 - new subparagraph 160AAA(1)(b)(i)] . It is inappropriate for people in these circumstances, who are in effect in receipt of payment for the services they provide to their employer, to qualify for a rebate which is designed to assist recipients of a living allowance paid as part of a government benefit.
2.26 It may be noted that all or part of a Commonwealth education or training payment to which new subparagraph 160AAA(1)(b)(i) applies may nevertheless qualify for exemption under new section 24ABZF as a supplementary amount. This reflects the fact that payments which satisfy the definition of supplementary amounts in new section 24ABZE are not paid either for services provided or as a living allowance, but rather as government assistance to defray certain costs.
2.27 If all of a Commonwealth education or training payment is exempt under new section 24ABZF then the recipient will not qualify for a beneficiary rebate because no part of the Commonwealth education or training paymentis included in the recipient's assessable income (subsection 160AAA(3) of the Act).
2.28 The second type of Commonwealth education or training payment which does not entitle the recipient to a beneficiary rebate is one paid by way of a scholarship, bursary or other educational assistance on condition that services will (or will if required) be rendered or continue to be rendered to the Commonwealth. Again, it is inappropriate for people in these circumstances, who are receiving payment for the services they provide (and who are not exempt under paragraph 23(z) of the Act), to qualify for a beneficiary rebate [new subparagraph 160AAA(1)(b)(ii)] .
2.29 Commonwealth education or training payments are already referred to within the definition of 'eligible income' in subsection 159ZR(1) of the Act, but the new term is not used. Item 10 substitutes the term for consistency.